Bank of England Raises Rate Again

Today the Bank of England have put up interest rates for the eight consecutive time and by the largest amount since 1992. I remember Black Wednesday, the last time rates went up by this amount in 1992, I was in sixth form and it was discussed in my A level Economics class. Back then the government were in charge of setting the rate, now the Bank of England has autonomy to set rates independently as it sees fit.

What Does It Mean for my Mortgage?

If you have a tracker mortgage then your lender will be in touch to notify you of the increase and inform you of what your new payment will be from next month, as a rule lenders tend to apply any rate changes the month after the change.

The jump is 0.75% from 2.25% to 3%. So if your tracker is Base + 1% you’ll now be paying 4%.

If you are on a fixed rate then your payment is not going to change until you reach the end of your fixed deal. You will need to keep an eye on when your deal expires and speak to your broker or your lender around six months before that deal expires.

What does the Future Hold?

Clearly a difficult question. The Bank of England Governor, Andrew Bailey has today said:

“From where we stand now, we think inflation will begin to fall back from the middle of next year, probably quite sharply.”

“To make sure that happens, bank rate might have to go up further over the coming months.”

“We can’t make promises about future interest rates. Based on where we stand today, we think bank rate will have to go up by less than currently priced in financial markets. And that’s important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.”

The BoE governor adds that today’s decision “should not lead to higher mortgage rates”

I’d say that last sentence is reassuring, mortgage rates started going a bit crazy about six weeks ago and in the last few days we have seen some lenders reducing rates, albeit very small reductions. The markets seem to be pricing in a high of around 5.5 to 5.75% which is a little lower than the previously thought 6%. It is still the case that a five year (in some cases 10 year) fixed rate is priced lower than two year fixed rates, which is strange as usually you would expect the longer the fixed rate the higher the rate will be. I am reassured by the small reduction over the last few days and think the market will regain some competitiveness over the coming months.

However I think we need to be prepared for tough times ahead, house prices potentially falling by around 10% and the cost of living continuing to increase so it is important to keep an eye on your mortgage rate and when your current deal expires. There is no doubt if you are approaching the end of your fixed deal you need to be prepared for an increase in your mortgage payment.

As ever I am delighted to discuss your options with no obligation.

Taxing Times

Following on from last week’s article about buy to let this week some of the tax issues around buy to let are covered.

 Changes landlords need to know about

If you’re considering becoming a landlord and renting a property, or if you’re already in the process of doing so, it’s important to be aware of your tax obligations. Rules on paying tax when renting out your property are ever-changing and can be quite complicated.

As a landlord with an investment property, you’re likely to pay tax at every stage of the life of that investment – when you buy the property, when you let the property, and later when you sell or pass it on. Letting a property is like any other business – if you make a profit, it’s liable to taxation.

In the current 2022/23 tax year, HM Revenue & Customs (HMRC) introduced some important changes to a number of different forms of tax that apply. The tax changes could also affect income landlords receive from other sources.

Key tax changes introduced for the 2022/23 tax year affecting landlords

National Insurance contributions

National Insurance contributions (NICs) increased by 1.25% from 6 April. Rental income is not subject to NICs unless you’re a professional landlord running a property rental business – being a landlord is your main job, you rent out more than one property and buy new properties to rent out. If you are a professional landlord running a property rental business, currently you must pay NICs if your earnings exceed the Class 2 and Class 4 NIC thresholds.

If you’re not a professional landlord but you earn income from other sources upon which you currently pay NICs, for example, if you’re an employee, sole trader or member of an ordinary partnership, your NICs have increased by 1.25%. If you employ people, such an administrator or maintenance person for your property portfolio, your share of their Class 1 NICs increased, while any Class 1A and 1B payments employers pay on employee expenses and benefits have also increased.

Income Tax

Any rent that you receive, any non-refundable deposits or any additional payments that you receive from your tenants, such as the cleaning of communal areas, property repairs or utility bills all class as income and must be declared. The same principle applies for any money that’s kept over from a returnable deposit at the end of the tenancy.

The personal allowance, the amount upon which no Income Tax is payable, is £12,570 during this tax year – this equates to £1,048 a month or £242 a week. The personal allowance limit is £100,000, so if you earn over £100,000 a year, your personal allowance will be reduced by £1 for every £2 earned over the £100,000 limit. 

Beyond the personal allowance, in England, Wales and Northern Ireland, the basic rate of 20% is payable on taxable earnings between £12,571 and £50,270 a year, then 40% (the higher rate) on £50,271 to £150,000 and 45% on annual earnings over £150,000. The tax rates in Scotland are different, but the personal allowance is the same.

Tax on dividend income increased by 1.25% from 6 April this year. If you earn any income from dividend payments, after your £2,000 annual allowance, and if you’re a basic rate Income Tax payer, you’ll pay 8.75% tax on dividend payments (7.5% was the previous percentage). If you’re a higher rate Income Tax payer, from 6 April you now pay 33.75% (up from 32.5%) and additional rate Income Tax payers will pay 39.35% (up from 38.1%) on their dividend income.

Value Added Tax 

From April this year, landlords with a VAT-registered business with a taxable turnover below the VAT threshold of £85,000 will need to comply with Making Tax Digital (MTD) for VAT requirements. These mean you must maintain digital records using MTD-compatible software and report figures online to HMRC each quarter.

All current Self Assessment taxpayers, which includes private landlords, will need to comply with MTD for Income Tax requirements when they are introduced. Beginning from 6 April 2024, this affects any private landlords who currently file Self Assessment tax returns and will require you to also use MTD-compatible software to maintain digital records of your income and outgoings. 

You’ll need to send quarterly updates to HMRC online and submit an end-of-period statement and final declaration, so that your tax liability can be calculated. You’ll no longer need to complete a Self Assessment tax return once MTD for Income Tax Self Assessment is introduced.

Capital Gains Tax

If you’re looking to sell a buy-to-let residential property, you may be subject to a Capital Gains Tax bill depending on the gains you make, rather than the amount you sell the property for. Equally, if you’re letting all, or part of the property, a proportion of any gain when you sell it could be taxable.

In the 2022/23 tax year, landlords and investors who sell a residential property will have 60 days (up from 30 days) to complete the Capital Gains Tax process. This was announced during the Autumn Budget in late 2021, doubling the time property investors have to report any Capital Gains Tax. 

Landlord Tax Relief

Buy-to-let mortgage tax relief is now reduced to zero. During the 2022/23 tax year, landlords receive a 20% tax credit on interest payments. It is worth noting that the mortgage restrictions only apply to individuals. That is why many people have chosen to purchase buy-to-let properties through a limited company, where they are effectively taxed on profit rather than income.

Starting or expanding your property portfolio?

Whether starting or expanding your property portfolio, we're here to help. To find out more, contact The Surrey Mortgage Broker – telephone 01252 759233 – email richard@thesurreymortgagebroker.co.uk

Long-Term Rental Sector

Legislation has had an impact on the buy to let sector over the last decade. It is still a strong market to be in though and I am still getting plenty of enquires from both experienced and new landlords. This article looks at some of the changes that have taken place. 

Landlords still positive following recent and proposed legislative and tax changes

The government published its long-awaited rental reform white paper on 16 June 2022, which included measures to encourage pet ownership and scrap Section 21 evictions.

Buy-to-let landlords across the country are getting their heads around recent and proposed legislative and tax changes, but many are still positive about finding attractive returns in the long-term rental sector. However, the picture is still somewhat mixed over whether buy-to-let landlords are staying or leaving the sector right now.

Property investment 

Research looking at the mortgage market has revealed that the number of buy-to-let mortgages issued in the year to February reached 275,600 – the highest figure since 2016[1]. 

New mortgages taken out by buy-to-let landlords – either those new to the property investment world or those buying additional properties – was up to 110,000. This compares to just 75,800 taken out in the 12 months to February 2020, according to the research. 

Raised rents

But more than a third of landlords have considered selling rental properties due to the loss of the buy-to-let mortgage interest tax relief, while one in four have raised rents[2].

Landlords could previously deduct mortgage expenses from their rental income in order to help reduce their tax bill. However, this started to be phased out in 2017 before being stopped in April 2020. 

Rental properties 

Now landlords receive a tax credit, based on 20% of their mortgage interest payments, which is less generous for higher rate taxpayers, who previously received 40% tax relief on mortgage payments.

The findings reveal that 37% of landlords have considered selling rental properties as a result of the recent changes. Nearly eight in ten landlords (77%) feel the changes unfairly punish them, with the same percentage (77%) saying there should be more support for landlords, especially post-pandemic, leading to many considering selling their properties. 

Legislative changes

More than a quarter (26%) of landlords with larger portfolios (20 plus properties) have reduced their portfolios to reduce the tax impact, compared to 13% of those with between two to five properties. 

Over half (55%) of those landlords planning to sell up identified recent legislative changes, followed by forthcoming legislative alterations, such as the scrapping of Section 21 (the first step a landlord currently has to take to make a tenant leave their property).

Tax changes 

The changes, however, may also be forcing up costs for some tenants, with one in four landlords (25%) having raised rents to cover the increased tax burden. This figure jumps considerably to 58% for landlords with 20 or more properties on their books.

In recent years, there have been numerous regulatory and tax changes for landlords to deal with. The loss of the mortgage interest tax relief and other legislative changes are causing some to question whether to leave the sector altogether by selling some or even all of their properties in order to help reduce their tax burden. Rental increases are also a reality, with one in four landlords recouping losses from tenants, many of whom will be struggling with the rising cost of living.

Rental income 

The survey also reveals that the average total gross rental income is £17,200, which is up on the £15,000 calculated in 2018. More than half (56%) of landlords have a rental income of less than £20,000 and 29% bring in between £20,000 and £49,999. Landlords earning more than £50,000 from their portfolio account for 15% of the survey participants.

The government estimates that, on average, landlords earn 47% of their total income from property – an increase on the 42% recorded in 2018.

Getting ready to make your next buy-to-let move?

It’s a complex time to be a landlord. We can help you get your head around the rules when investing in buy-to-let property, managing your portfolio and looking to raise mortgage finance. For more information, contact The Surrey Mortgage Broker – telephone 01252 759233 – email richard@thesurreymortgagebroker.co.uk

Source data:  [1] https://www.knightfrank.com/wealthreport

[2] Research conducted by BVA BDRC with 796 UK landlords between 5–21 December 2021

'It's a sprint, not a marathon'

This has some interesting information about the house buying process. Gazumping is a thing, although in my experience it is pretty rare, if there’s a lot of interest then in my experience it goes to sealed bids.

31% of homeowners gazumped at least once while trying to buy their property

Four-fifths of homebuyers are in favour of banning gazumping in England and Wales, new research revealed[1]. It found that 31% were gazumped at least once while trying to buy their property, with the figure rising to 52% among those who bought in London.

Gazumping occurs when a property seller accepts an offer from a buyer, only to then accept a higher offer from another buyer. This can happen at any stage of the sale process, from when an offer is first made, to just before exchange of contracts.

Move to exchange contracts quickly

It’s worth noting that gazumping isn’t currently illegal in England and Wales, so if you’re involved in a property sale, it’s something you need to be aware of.

If you’re the buyer who has had their offer accepted, then had the rug pulled out from under you by a higher offer, it can be hugely frustrating and expensive. The best way to avoid this happening is to move quickly once your offer has been accepted, and try to exchange contracts as soon as possible.

It could come back to bite you

As a seller you can accept an offer, but it isn’t legally binding and you could then subsequently accept another, higher offer from a different buyer, right up until the point of exchange. However, if you do choose to gazump a prospective buyer in this way, it’s worth bearing in mind that it could come back to bite you – if they eventually decide to pull out of the sale.

While 79% are in favour of the government introducing laws to ban gazumping in England and Wales, 47% admitted they would consider gazumping a rival buyer themselves in the future if it meant getting the property they wanted.

High demand and limited supply 

The research found that 68% of homeowners feel the property market is too competitive, with 79% believing that gazumping and gazundering have become more common in recent years due to high demand and limited supply.

Of those who have been gazumped, 17% said they ended up buying a property they liked less.

Elsewhere, the study found that a quarter (25%) of homebuyers were gazumped because they were stuck in a long property chain and took too long to complete the purchase. 

Property purchase falls through

Another 20% admitted that they were gazumped due to delays and long waiting times in getting a mortgage. Almost a quarter (23%) said that they lost money in intermediary fees as a result of being gazumped. This is noteworthy, given it is estimated that homebuyers lose an average of £2,700 when a purchase falls through.

The research shows that long property chains and time-consuming mortgage applications often leave homebuyers open to gazumping. So, preparation is key – sourcing the right lender and product ahead of time, and working with service providers who can act quickly, could prove crucial in ensuring a deal is completed with no complications.

What kind of mortgage do you need?

We want to help get any generation on the property ladder, from the first-time buyer to the last-time buyer. We’ll help you to speed up the process to find a mortgage that’s right for your specific needs. To discuss your options, contact The Surrey Mortgage Broker – telephone 01252 759233 – email richard@thesurreymortgagebroker.co.uk

Source data: [1]  Market Financial Solutions survey of more than 500 people who have bought a home in England or Wales since 2012.

Why Are Mortgage Rates so High?

In this blog I am going to attempt to explain why current mortgage rates are so much higher than they were a year ago. The obvious answer is that the Bank of England have raised rates for the historic low of 0.1% to 2.25% over the course of the last few months. That is only part of the equation though as the level of the Bank base rate is still historically quite low and mortgage rates are significantly higher than this.

This time last year it was possible, with the right amount of equity, to secure a fixed rate for five years at under 1%. Today you will be lucky to get near 5%. Its even higher if you are looking for a shorter term fixed rate, according to Moneyfacts the average two year fixed rate (as of 4th October) was 5.97%

The cost of borrowing has been historically low since the financial crisis in the late 2000’s. Since that time there has been widespread quantitive easing, or money printing, particularly in the 18 months from March 2023 during the Covid lockdowns. The greater supply of money has contributed to the high rates of inflation we are now seeing. On top of this there is a labour shortage, a supply shortage and now a war in Europe making matters worse.

Bank of England

The inflation alone will lead to the Bank of England raising rates as it is pretty much the only tool they have to combat this. They are guilty of saying the inflation was transitory last year, clearly not the case and so have had to raise rates quicker than they may have liked in order to try and kerb this inflation. Another problem they have is that the inflation seems to be linked more to the supply issues and costs of materials and fuel. None of which can be controlled by raising interest rates.

However I’m digressing as the issue we have is why are the mortgage rates on the high street so much higher than prevailing Bank of England rate?

Lenders’ funding comes from various sources, customers’ savings, government funding schemes and wholesale markets. These wholesale markets can change quickly depending on the wider economic context. Right now that context includes an energy crisis, high inflation and a war!

For fixed rate lenders use swap rates where, as the name suggests, two different parties swap interest rates, this means the price of your fixed rate mortgage is based on what the lender can borrow in the swap market. During the time the Bank of England has raised rates from 0.1% to 2.25% two year swap rates have gone from 0.44% to 5.56% (as of 26th September).

This rapid change in the rates has led to lenders reacting very quickly and withdrawing products after them only being available for a few days, thus leading to quite a bit of panic buying and lenders being swamped with applications. This then forces them to withdraw deals to maintain service levels as well so it is a bit of a vicious circle.

Simon Gammon, managing partner at Knight Frank Finance, observed “Inflation is climbing rapidly and rates are going to rise as a result. Swap rates suggest that investors believe we’re going to see a spike in costs and rates over the next 12 months to two years before markets start to normalise.” What “normal” is though was not discussed but I think things will settle around the 3-4% mark in a year or so.

I hope this has helped explain some of what is going on at the moment. I am not an economist but I have been a mortgage broker for over 20 years so have a bit of experience.

I love getting feedback so if you would like to talk about this article or any other mortgage related area, please get in touch.